Jefferies India forecasts a doubling of domestic defence spending by FY30, driving optimism in stocks such as Hindustan Aeronautics (HAL), Data Patterns, and Bharat Electronics (BEL).
Jefferies India, a leading brokerage house, has initiated coverage on HAL and Data Patterns with a “buy” rating, maintaining a positive outlook on BEL’s prospects. HAL, labeled a potential multibagger stock, has a 12-month price target of Rs 3,900, implying nearly 13% upside from current levels.
Similarly, Data Patterns’s price target of Rs 3,545 suggests over 31% potential upside from the current price.
India ranks among the top three global defence spenders, yet its spending in 2022 amounted to only 10% of US spending and 27% of China’s. The country stands as the second-largest importer of defence equipment, accounting for 9% of global arms imports.
Jefferies analysts Lavina Quadros and Koundinya Nimmagadda foresee India’s capital defence spend maintaining a 7-8% Compound Annual Growth Rate (CAGR), driven by indigenisation efforts.
Data Patterns, a key player in defence and aerospace electronic solutions, anticipates a nearly fivefold increase in revenues by FY30, supported by indigenisation initiatives and export opportunities.
Data Patterns supplies crucial components for Brahmos missile systems and Sukhoi aircraft, both of which have high export potential. Jefferies projects exports to constitute 24% of Data Patterns’s sales in the medium term, up from 16% in FY23.
HAL’s product business stands to benefit from the government’s focus on domestic aircraft manufacturing. The company’s landmark technology transfer deal with GE for manufacturing jet engines positions it as a key beneficiary of defence-level tie-ups.
Jefferies forecasts HAL’s exports to contribute significantly, reaching 16% of revenues by FY30 from just 2% in FY24. Despite trading at relatively high valuations, HAL and Data Patterns are expected to witness substantial profit growth, maintain over 20% Return on Equity (RoE), and possess debt-free balance sheets with proprietary technology.
In addition to robust revenues, improvements in Return on Equity (RoE) and reduced working capital intensity further bolster the favorable outlook for Data Patterns. HAL’s strategic tie-ups and anticipated export growth reinforce its position in the sector.